A vast amount has been written in the last year or so concerning the potential liabilities faced by directors and officers in the financial downturn and the importance of D&O insurance cover. An area which has been less well covered is directors' liabilities arising from environmental matters.
The introduction of the Companies Act 2006 (the Act) resulted in the codification of the existing common law duties for directors although one duty represented a departure from the common law - the director's duty to promote the success of the company. In meeting this duty the Act identifies six factors to which a director must have regard; one of which is the impact of the company's operations on the community and the environment.
Directors face both indirect and direct risks from the impact their decisions may have on the environment. Indirect risk, for example from shareholder derivative actions, as set out under the Act, arising not just from breaches of a director's duty to his company but also from his negligence in performing his job and any default. Shareholders awareness is heightened by the Act's requirement for extensive reporting. Companies are to produce an expanded business review which keep members informed of the company's operations and quoted companies must specifically include information on environmental matters. Direct risks are faced from statutes imposing liabilities on directors, for example the Environmental Protection Act 1990.
In a world where there is increasing global pressure on the implementation of carbon emission-reducing strategies as well as environmental legislation aimed at reducing pollution and environmental hazards, the duty imposed by the Act increases the pressure on directors to pay due regard to environmental matters in decisions in the boardroom. With this in mind the Environmental Liability Directive (the ELD) is scheduled to become part of UK law either at the end of this year or early 2009. There are potentially significant exposures to companies as the ELD looks to reinforce the "polluter pays" principle. The introduction of this directive comes on the back of such legislation as the Waste, Electrical and Electronic Equipment Directive which came into force in January 2007.
Directors should therefore pay more than lip service to the environmental impact their decisions and the strategies they agree upon may have and ensure that their D&O policies cover the potential risks they face.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
